The Effects of Oil Windfalls on Political Corruption: Evidence from Brazil

Oil royalties provide a substantial but volatile inflow of non tax-payer money to municipal coffers. While a large literature examines the impact of oil on democratic stability, I examine how oil impacts corruption and the types of candidates elected under democracy. I develop a formal model and show that natural resource windfalls generate the strategic entry of corrupt candidates creating cycles of corruption and reelection. I test this theory in Brazil, where offshore royalties are determined exogenously based on a geographic rule. Consistent with the model, I find that a one standard deviation increase in oil royalties produces a 29% increase in corruption. The effects of windfalls on corruption are larger after elections during booms and lower during busts. Furthermore, oil royalties lead to a reelection cycle. Taken together, these results point to a strong effect of oil royalties on local level corruption and electoral outcomes.